Saudi Arabia’s fiscal deficit narrowed by a sharp 84% Y-o-Y in 2Q18 to SAR7.4bn thanks mainly to an 82% Y-o-Y rise in oil revenues, despite strong expenditure growth. Higher oil revenues, obviously, were due to the recovery in oil prices, which finally showed on the budget after a disappointing revenue number in 1Q18 (where revenues rose only 2%) probably reflecting a shift towards a new framework of quarterly dividend transfers by Aramco to the state budget. As such, we do not see 2Q18’s exceptionally low deficit level as sustainable. Non-oil revenue growth remained strong (42% Y-o-Y) benefiting from the implementation of fiscal measures enacted earlier this year, led by the introduction of VAT and increase in fuel prices. Meanwhile, revenues from income taxes and customs contracted due to the weak economic backdrop. With oil prices stabilising around USD70s/bbl so far and non-oil revenue set to accelerate in 2H18 (given the dividend season in 4Q), the budget could be on route to beating our fiscal deficit target of SAR215bn (7.9% of GDP), which still assumes oil at USD60/bbl for this year. Assuming USD70/bbl, our forecast deficit would narrow to SAR130bn (4.8% of GDP).

Double-digit spending growth; investment recovers

Spending growth remained in the double-digit zone for the second quarter in a row, expanding 33.5% Y-o-Y in 2Q18 and accelerating from 17.8% Y-o-Y in the preceding quarter. A sharp jump in capital spending (45% Y-o-Y following an 11% contraction in 1Q18) drove this acceleration and was the key highlight of the budget numbers this quarter. Current spending growth also accelerated (31% Y-o-Y from 24% in 1Q18) driven mostly by higher social spending. Spending remains supported due to i) citizens account, which is counterbalancing the government’s fiscal measures; ii) allowances for public employees approved by a royal decree in January; and iii) strong growth in wages (27% in 2Q18 vs. 20% in 1Q18).

Public capex recovery still not impressive enough

We note that the strong investment growth in 2Q18 is not that impressive when put within a wider context, as this only translates into 3% Y-o-Y growth when annualised (even when accounting for the fact that 60% of total public spending is in the second half of the year). Such an outcome would leave capital spending 10% short of a budgeted SAR205bn. As such, we should still see further acceleration of investment spending in 2H18 before seeing any strong read-through to the wider economy.
Mohamed Abu Basha